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Is This Gold Producer Able to Rally in 2013?

February 27, 2013

Shares of Barrick Gold Corporation (NYSE: ABX) continued their downward trend from 2012 and lost almost 12% of their value in 2013 (year-to-date). Barrick along with Goldcorp Inc. (NYSE: GG) have decided to report the full costs of their productions in an attempt to be more transparent and perhaps regain the confidence of investors. Will this transparency be enough to bring back investors? More importantly, will Barrick rally in 2013?

Gold Production

In 2012, Barrick produced around 7.42 million ounces of gold. In the company’s 2013 outlook, Barrick is expected to produce between 7 and 7.4 million ounces of gold. This puts the mean at 7.2 million ounces, which will be 2.7% below the production in 2012. If the company will cut its production by 2.7%, assuming all things equal, this could result in a similar drop in revenues in 2013. This is one aspect that should worry investors. Then there is the matter of costs.

Costs in 2012-2013

Since the company is trying to be more transparent, the cost of production is in fact much higher than its “total cash cost”. The company’s average All-in sustaining cash costs were $945 per ounce in 2012. It rose to $972 in the last quarter of 2012. Furthermore, the company’s projection is that this cost will rise in 2013 to the range of $1000-$1100 per ounce. This will represent around an 8% rise in costs. Assuming all things equal, the company’s operating profitability might fall by around 4 percent points. So based on the current operating profitability of the company of around 40% (after controlling for the $6.5 billion unusual expense that include impairment goodwill charges), the rise in costs could cut the profitability to around 36%. This is before considering the final factor – the price of gold.

Gold Price

The company used in its 2013 outlook the average price of gold at $1,700. This projection was based on current market prices. I think this assumption is reasonable but could turn out to be much lower. Keep in mind the price of gold has already declined by late February to around $1600. Moreover, the gold didn’t rally (up to date) despite the decision of the FOMC to launch QE3 back at the end of 2012. This decision should have raised the concerns of a potential devaluation of the USD, which tend to raise the demand for safe haven investments including gold. But up to now this scenario didn’t occur. If the US dollar won’t tumble against other leading currencies, and the inflation will remain low, this could impede the potential growth of gold prices in the coming months. For now let’s assume that $1,700 will be the average price of gold in 2013.

Revenues and Profitability from Gold in 2013

Based on the above, if we except the assumptions of the company, then its revenues from gold alone will decline in 2013 by nearly 1%; its profit will fall by nearly 13%; its profitability will decline from around 43% to 38%. If you assume the price of gold will remain around $1,600 per ounce, the revenues fall by almost 7% compared to 2012. So you get the picture…

The situation isn’t likely to be a whole lot better of another big gold producer – Goldcorp.

Shares of Goldcorp also haven’t performed well in 2013, as they declined by nearly 10% since the beginning of the year. The low growth in revenues may have contributed to the decline in the company’s stock. During 2012, the company’s revenues rose by only 1.4% in 2012 – a very similar growth rate as Barrick. The operating profitability of Goldcorp was around 39%, which was also close to the profit margin of Barrick. Therefore, Goldcorp might be facing in 2013 similar circumstances, which could result in a decline in revenues and profit margins.

The same goes for other gold producers such as Yamana Gold, Inc. (NYSE: AUY). The company’s stock also fell by 10% (YTD). Its revenues grew by 7.5% in 2012 compared to 2011. This company also has a profit margin of around 37%. But unlike Barrick, this company is expected to increase its production by nearly 20% to 30% in 2013. So even if the price of gold will fall and the costs will rise, the company will still be able to maintain its growth.

So why consider gold companies?

One of the main advantages of gold companies (but not only) over investing in gold or ETF is that they are able to pay dividend over time. But the dividend yield isn’t high: Goldcorp offers a yield of 1.8%; Barrick offers 2.6% annual yield; Yamana is paying an annual yield of 1.7%. But I think this isn’t enough to consider such an investment with high risk.

The Bottom Line

For those who still wish to consider having gold in their portfolio, then they might want to stir away from gold producers that aren’t likely to recover in 2013, not even if they will augment their dividend payment. One might consider gold royalty companies such as Royal Gold or investing in gold ETF.

Disclaimer:The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.